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Feb 25, 2013, 05.54 PM IST | Source: Moneycontrol.com

How gold may behave during Budget week

Emkay Commotrade has come out with its special report on Gold. According to the research firm, stronger rupee, lesser demand, reduced safe haven appeal, improving economy, expected controlled inflation and more open markets is expected to come from FinMin in the budget which can surely dent the gold prices.

Emkay Commotrade has come out with its special report on Gold. According to the research firm, stronger rupee, lesser demand, reduced safe haven appeal, improving economy, expected controlled inflation and more open markets is expected to come from FinMin in the budget which can surely dent the gold prices.

Credit Downgrade - Budget this year would be very crucial not only for the commodities markets, but also for other financial markets and for the economy as whole as it is a last budget before 2014 elections. It is expected to be the most rigorous budget this time as India is trying to reduce its fiscal deficit and trying to skip the major credit downgrade. The prime target is to focus on reducing the spending by the government which has already been started and has reached almost 9% from the initial target

Spending Cuts In the upcoming budget’s spending cuts the prime focus would be to reduce the imports of Gold and Oil, according to RBI around 80% of India’s Current account deficit is due to gold imports. Already steps have been taken to reduce the imports of Gold and Oil and further increase in import duty is expected in the budget. However the major factor which will play an important role to determine the direction of gold prices would be the fluctuation in Indian rupee demand for Gold in India, checking its safe haven appeal and inflation hedge appeal.

Rupee Fluctuation - The rupee fluctuation has always been a crucial factor in determining Gold prices and it is well known that a weaker rupee can support the gold prices and vice versa. As anticipated if there are more spending cuts and reforms taken to boost the equity markets and debt markets we would see a possibility of rupee strengthening and pushing gold prices down. Recently after a series of reforms taken by the government on gold import duty, rate cut and partial deregulation of diesel prices we saw a good fall in gold prices along with the strengthening of Indian rupee. The reforms opted to reduce the Fiscal Deficit will make INR stronger and gold prices weaker; at the same time the level and ways of reforms will also form a crucial part in deciding the fate of gold. In pre-budget discussion among the party the finance minister assured that by the spending cuts and other reforms economy can see a growth level of 6-7% in the coming fiscal year. Also, FinMin has already committed to a fiscal deficit of 4.8% of GDP in 2013-14 which indicates lesser spending and tightening of imports and stronger rupee. This means, more open markets for investors abroad, reduced spending, reduced fiscal deficit and stronger rupee. As this fiscal consolidation can improve the outlook of the economy it will also reduce the safe haven appeal for gold and reducing the demand for gold

Economy outlook and Gold - A positive outlook for an economy is always been an eye for an investors to go for riskier assets. Investors will focus more on open markets and will go with the flow. This means that an investor who was more prone to safe investment such as gold before would then opt for riskier assets such as equities, derivatives etc. to increase their disposable income. Gold’s inflation hedge appeal and safe haven appeal would be dampened marginally due to which prices can be under pressure. However, in India gold buying is a tradition so buying will be seen in the later weeks when prices reach to an optimum level. So does this mean we should buy gold now? The clear answer would be, No. As budget is expected to be not Bullion friendly we recommend being on selling side rather than buying. Stronger rupee, lesser demand, reduced safe haven appeal, improving economy, expected controlled inflation and more open markets is expected to come from FinMin in the budget which can surely dent the gold prices. Adding fuel to the fire could be introduction of Commodity Transaction Tax(CTT), it will increase the cost to transact in commodities and reduce the demand for major commodities. At the same time we do not expect a boost in the gold demand as physical demand of gold in India and abroad is in slack. The demand for gold in 2012 was stagnant due to overall economic slowdown and in 2013 the demand for gold isn’t looking that great either

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